You can see in the way that Paul Ryan nods at Alan Greenspan’s answer that this is going in one ear and dribbling right out of the other. Given as Greenspan says, that the government cannot possibly run out of money to pay social security beneficiaries, and given that anything in the private sector can run out of money, then private investment accounts are obviously much less secure than federal government operated social security.

At this time what I am calling the Modern Money Model goes by the name of Modern Money Theory as far as its other proponents are concerned. I think that MMM or MMT is a good model of the reality of how money works. The acceptance of the part that applies to the sovereign money of a country like the United States of America is meeting fierce resistance in some quarters.

To put it very briefly, in a country that creates its own money, uses only its own money to transact business, and has idle resources in labor and capital, then the entity that creates the money needs to put more of that money into the hands of the people who can put the idle resources to productive use.

I think a fair amount of resistance of this idea is the fear that people have that when we run out of idle resources we will have inflation, even hyper-inflation. We proponents tend to have a standard response, “That’s not the problem we have now. Let’s take appropriate actions for the situation we have now.”

I think it is only reasonable for skeptics to have their doubts if that is our only answer. MMT proponents like L. Randall Wray and Stephanie Kelton, to name a few, do have better answers to the question, but I think this topic needs to be discussed in more detail in public forums.

My understanding of the answer is that we use taxes to take excess money out of the economy when we start to have more money than we need to employ the actual resources that we have. We faced this situation in WW II. Besides rationing and prices controls, there was another technique that was used. The government sold war bonds to the people. The purpose was not to finance the war, since creating money was not problem. The purpose was to temporarily take the money out of the hands of the people who wanted to buy things that we did not have the resources to produce. After the war was over, and the economy could return to producing consumer goods, people would be able to redeem their war bonds to start buying this new output from our economy.

When we start to discuss these solutions in detail, we must face up to the political and human nature resistance to the solutions that will occur when we try to implement these solutions.

Back in the 1970s we had high inflation that was exacerbated by the OPEC oil embargo. Many people and I felt that the solution to the problem was to raise the taxes on gasoline, for one. This would make it even more expensive to buy the product that was in short supply, and therefore reduce the demand for it even faster than was happening already. Most people used the exact opposite logic to resist the tax increase. They said that the price of gasoline was already too high. Why make things worse? The resisters won out, and we had inflation until Ronald Reagan came along and put the country into a near economic depression to rein in consumer demand that was fueling the inflation. Reagan’s solution was much more painful for more of the population that a gasoline tax hike would have been.

I think this example is a great demonstration of why MMT (MMM) proponents need to talk about these issues now, before we are in the type of crisis we faced in the 1970s. If people are educated when not facing the crisis as to what will have to be done should we face a crisis like that, then they will be more prepared to take the actions that need to be taken. If we wait for the crisis to happen, and then spring it on people that taxes need to be raised, then there will be stiff opposition.

This month has seen the antipodean central banks both cut rates, with almost no flow through to mortgages to relieve consumer debt and an appreciation in their respective currencies, in perfect opposition to their stated goals.

This is not a new trend – far from it. What’s supposed to happen when the local economy slows is you pull the lever, Kronk, lower interest rates stimulate consumer spending, reducing savings rate as a deluge of money floods the economy, inflation goes up, wages go up, more spending and whoosh, in come the accolades from the captured business media elites.

Now levers are pulled left right and centre and nothing seems to happen, further hindered by a lack of communication from both monetary and fiscal authorities into the truth of the matter at hand – that a lack of confidence in the direction of the economy is what is holding back consumer spending, not lower rates.

I’d like to throw out the following challenge to conventional economic theory.

Does even a fiscal stimulus of a budget deficit always stimulate the economy?

I have been thinking that with our current system, the federal government finances deficits by selling bonds. So whatever liquidity they push into the system is offset by taking it right back out in the form of bonds sold.

What deficits really do to stimulate the economy is to redistribute a fixed amount of liquidity in the private sector. When this entails taking money from the wealthy who do not recirculate it, and putting it in the hands of working people who do circulate it, then we get stimulus.

When deficits don’t stimulate the economy is when the deficit is the result of tax cuts that leave the liquidity in the hands of the wealthy. Taking liquidity from the hands of the workers when we shift the tax burden from the wealthy to the workers is the opposite of stimulus.

I’d love to see some research done on this idea and some article published.

How did the Chinese government get so smart about running a capitalist economy? How is it that a former communist country knows more about macroeconomics than John McCain and his advisers? Could it be that they have left ideology behind in order to focus on what works? Will the few remaining Republicans in the US Congress get out of the way and let President-Elect Obama and the Democrats do what needs to be done?

The central banks of the world like the Federal Reserve in this country are drastically lowering interest rates to stimulate the economy. In this environment, this will not work as well as they wish it would. This should not be hard for capitalists to understand if they give it half a moment of thought.

Suppose you are a manufacturer of widgets. Suppose your warehouses are full of inventory and your factories are producing widgets faster than you can sell them. Suppose you look around and see that your competitors in the widget making business are in the same position. Moreover, they are cutting prices like mad in an attempt to sell what they already have produced.

You are all using up whatever cash you have to pay employee salaries, pay for energy to keep your buildings open and machines running, pay to run the trucks to carry your inventory to warehouses and the few customers that are still buying.

What kind of a deal on low interest rates do you think the bank would have to offer you to encourage you borrow to invest in more factories, hire more employees, and buy more raw materials?

If it takes you more than 30 seconds to conclude that there is no interest rate at zero or above that could get you to invest, then you aren’t much of a capitalist.

If you are fairly wealthy and you see the cost of companies dropping like a rock, would you immediately start buying or might you sit on your cash and wait for a better deal to come along? What kind of interest rate would the bank have to offer to charge you to get you to borrow against your assets in order to buy more?

What is it that actually is in short supply and could benefit the economy by having more? We could have more public transportation for those who cannot afford to run their cars as much and so that we could use energy more efficiently, we could have better education so that our children would be able to be more productive when the economy turns around, we could get more modern water and sewer facilities to improve our health, we could do maintenance on our public infrastructure so that it won’t deteriorate from lack of care, etc. Paying people to do these things is what will get money flowing again. It will increase demand for the widgets and raw materials that you can’t give away now.

What entity can look at the big picture of the whole economy and afford to make decisions on a broader basis than one person or one company or one industry?

Follow this link to the article on Huffington Post about their Economic Honor Roll of “…those (who) issued warnings about the fragility of the financial system and sounded the alarm about an impending collapse before it all came crashing down.”

This is the article that I mentioned in the previous post. I only watched the first few videos in this article before my heart started to sink. Why I had to look up Naomi Klein after watching some of these videos, I’ll never know. I should bave my head examined. Maybe I will need to.

Here is your chance to participate in solving the real estate bubble problem. I am going to propose some ideas for solving it and you can help me flesh out the details in the comments. I’ll even include your name in the et. al. when we publish the finished plan.

The home mortgage grantors should be willing to renegotiate the mortgages to a new fixed interest rate and a new principal amount. The new principal amount would be more in line with the real estate’s present lowered value. In return for the reduction in principal owed, the mortgagee would take out a reverse mortgage for the difference between the original loan and the new loan. Of course the bank would not give out any money for the reverse mortgage because they already did that when they financed the original mortgage. The free market could determine what if anything the home owner would have to pay as a fee for getting the reverse mortgage.

The grantor of the reverse mortgage would have ownership in that part of the house covered by the reverse mortgage just like grantors of reverse mortgages do today. The same rules could apply upon sale of the real estate. A purchaser could buy the property at the lower price knowing that there is a reverse mortgage holder on any excess of that price. Or the purchaser could pay extra to payoff the reverse mortgage. The amount extra would be negotiable with the bank.

For the part of the house covered by the ordinary mortgage, the home owner would be building equity just like any other home owner with an ordinary mortgage. In exchange for avoiding foreclosure on the property and avoding paying the monthly payment for the original mortgage, the owner would be giving up the right to profit from the rising home price up to some negotiable amount near the original mortgage.

The grantor of the reverse mortgage could sell that mortgage on the open market just like they may do today. The free market would set the value that it would be willing to pay for a reverse mortgage on the part of the house that initially is above the current value. This is how the banks that kept the reverse mortgages could value these mortgages on their books.

There could even be futures markets for these reverse mortgages. This would provide an additional way for the banks to make money other than just selling the mortgages outright.

Greenspan, a lifelong Republican and longtime friend of McCain, said today on Bloomberg Television’s “Political Capital With Al Hunt” that “I’m not in favor of financing tax cuts with borrowed money.”

Here is another exerpt from the story:

Greenspan said the widening income disparity among Americans is a “very serious” issue, and requires both raising the pay of lower-income workers and reducing higher incomes. “The best way of doing that is to remove what is essentially protectionism for those skilled workers in the United States who are helped by keeping out their competition,” he said, referring to the issue of “skilled immigration.”

The U.S. education system is “critical” to help “cutting-edge technologies”replace older industries that will be phased out over time, Greenspan said.

Does this sound like stuff that McCain/Palin understands? Of course Greenspan’s remarks about “skilled immigration” have nothing to do with the really wealthy. Most of the people he is talking about make considrerably less than Obama’s $250,000 per year income cutoff for tax relief.

Follow this link to an article that will appear in this Sunday’s New York Times Magazine. It gives the most detailed view of Obama’s thinking on economics that I have seen so far. It is what gives me hope that there might be a group of people who really care about making this country work better even when all else looks like despair. (For despair, see my preceding post What’s The Matter With America)